By David Bau
Beginning this month, dairy farmers will have to make decisions on new dairy programs available for revenue protections. In order for dairy farmers to make informed decisions, they need to understand how these programs work and connect to their current farm finances.
The Agricultural Improvement Act of 2018 (Farm Bill) has a new program called Dairy Margin Coverage (DMC) that helps protect the milk price to feed margin. Dairy Revenue Protection is available through the Risk Management Agency and is a new tool that is like crop insurance for milk.
Farmers need to know their farm’s cost of production when making revenue protection decisions.
Your cost of production is the minimum price you need to break-even or make $0 profit. Knowing this will help you decide the milk price you need to fully cover your farm costs. You can calculate this on a per cow or per hundredweight (cwt) basis. Cost of production will vary by farm and by size of the farm. If you do not know your farm costs, you can go to the Finbin database to retrieve cost estimates for dairy farms of different sizes and regions of the state. If you do not have records for what your costs are, start keeping records.
Dairy Margin Coverage is part of the new farm bill. It is the replacement for the Margin Protection Program (MPP). DMC uses a nation-wide formula for feed cost, and subtracts this from the U.S. all milk price. This is the national milk price to feed margin and is calculated monthly. The premiums for DMC are substantially reduced from MPP; some are reduced by 70% for Tier I, which is under 5 million pounds. Tier II is 5 million pounds and up. Discounted premiums are available for Tier I if a farm signs up for five consecutive years of DMC in 2019 – which is a 25% reduction in the premium cost.
If a dairy farm participated in MPP-Dairy during 2014 through 2017 the farm can get 75% of premiums paid as a credit towards future DMC premiums. If a dairy wants the credit from MPP-Dairy as cash, they either do not want to sign up for DMC or they no longer milk cows, they can take 50% of the MPP-Dairy premium difference as cash. The amount of coverage is 5%-95% of the dairies’ largest production in 2011, 2012 or 2013.
Changes from MPP-Dairy to new DMC include: Reduced premiums, Tier I increased from up to 4 million pounds to up to 5 million pounds, expands coverage from 25-90% to 5-95% of production, increases margin coverage from a max of $8.00 to $9.50.
So far margins have been provided through April 2019. At the $9.50 margin, the estimated payments would be January $7.99 margin $1.51 payment, February $7.91 margin $1.59 payment, March $8.66 margin $0.84 payment, and April $8.82 margin $0.68 payment. The 2019 yearly average margin is predicted at $8.91.
For the first for month the average margin has been $8.345. If a dairy farmer had 200,000 pounds (2,000 cwt) of January milk produced at the $9.50 coverage level at 95% coverage: 2,000 cwt x (9.50-8.345) x .95 = $2,194.50 monthly average indemnity or a total of $8,778 for the first four months of 2019..
This same farmer, with 2,400,000 annual production, would pay an annual premium of $3,600 at the $9.50 coverage level (2,400,000 / 100 x $0.15/cwt). If the farmer committed for 5 years and received the 25% discount, the annual fee for 2019 would be $2,700 (2,400,000 / 100 x $0.1125/cwt).
This shows that the dairy farmer’s indemnity would be larger than the annual premium for 2019. Dairy farms should consider signing-up the largest amount of their production history, up to 5 million pounds, based on their 2011, 2012 or 2013 production levels.
Sign-up starts June 17 at your local USDA Farm Service Agency Office. The coverage is retroactive until January 1, 2019.
Dairy Revenue Protection
Forward contracting, LGM-Dairy and Dairy Revenue Protection are other programs to help manage risk.
Dairy Revenue Protection is a new tool that provides protection against an unexpected decline in revenue (price or yield) on the milk produced from dairy cows on a quarterly basis. There are five choices a farmer must decide on when enrolling in Dairy Revenue Protection: 1. Method to value milk (class or component), 2. Amount of milk, 3. Coverage level for revenue guarantee, 4. Protection factors, 5. Which quarterly contracts to purchase?
There are two different pricing methods for Dairy RP: the first is a combination of Class III and Class IV prices. You can choose any blend or mix from 100% Class III to 100% Class IV. The other option is component pricing which requires the farmer to select different expected butterfat and protein production levels. You can choose any amount of expected production to cover.
There will be validation checks to make sure a minimum of 85% of total milk production and 90% of components covered are actually produced. The coverage levels range from 70 % to 95%. Dairy farmers can also elect a protection factor level from 1.0 to 1.5 in 0.05 increments.
The last decision is what quarter to buy coverage for. A quarter is a three-month period starting with quarter 1. The prices for these premiums change daily. The Rice Dairy Risk Services site lists the prices and options that are available. Please talk with your crop insurance sales person about this program and coverage levels if it fits into your risk management plan for 2019 and into the future.
Another program to sign up for with Minnesota Department of Agriculture is Dairy Assistance, Investment, and Relief Initiative (DAIRI).
When farmers sign up for DMC at their FSA office they should be given our state forms in addition to their DMC enrollment form. The farmer must mail the following to MDA, postmarked by October 1st:
DMC enrollment form showing that they signed up for the 5-year option
State DAIRI application
W-9 form so that we can enter them into the state accounting system
2018 milk production document from their processor
Estimate are that a 10 cent per hundred weight up to 5 million pounds will be made soon after sign up.
There are new tools available to help dairy farmers maintain or improve their revenue stream. Please ask questions and be informed before you make your final decision.